With 2017 around the corner, advisors will want to dig into their tool bag to hammer away at two of the biggest changes to financial planning likely in the coming year. Those changes are fine-tuning approaches to fixed income investing and mulling over income and estate tax strategies.
Changes to fixed income allocations are due to rising interest rates, which are up 50 basis points over the past 13 months. Changes in tax strategies come courtesy of President-elect Donald J. Trump, who has called for simplifying the tax code and repealing the estate tax.
Like many advisors, Howard Erman, a financial planner and tax expert in Seal Beach, Calif., said the most important approach to take is to remain calm. You can do no worse than overreact to a changing rate and tax environment.
Interest from bonds will overcome any principal loss over time, Erman said. That’s because the income component continues no matter what happens to the value of the principal – so long as investors stick with quality bonds.
Soothing Investors at Both Ends
Overreaction tends to come from clients on both ends of the spectrum.
Ultraconservative investors who jolted out of bonds and into cash and money market funds soon find themselves infected with yield anemia. Meanwhile, the aggressive investor who eschews bonds for stocks simply invites too much risk.
Trigger-happy investors shooting from the hip in either direction, therefore, lead only to one outcome. That outcome is the destruction of the finely-tuned asset allocation balance crafted by the advisor, Erman said.
Floating-rate bonds and shorter-duration bonds provide advisors with fixed-income options, he said, but that’s not an excuse to abandon intermediate term high-quality bond funds.
As rates rise, they move closer to their long-term historical average, which financial planner Jon Luskin sees as an invitation to step away from dividend investing. Some market observers have predicted as many as three benchmark rate hikes in 2017.
“I’m looking forward to dividend investing falling out of favor given more normalized interest rates,” Luskin, with Define Financial in San Diego, told InsuranceNewsNet. “I’m looking forward to normalized stock valuations given increased investment returns available in fixed income.
Dividend-paying stocks often represent companies that are stable and profitable. Conservative investors like dividends because they provide steady income. But as rates rise, advisors don’t feel they should rely as heavily on dividend-paying stocks.
Estate Taxes and Income Taxes
During the presidential campaign, Trump promised to kill the estate tax, cut the tax rate and simplify the tax code by eliminating exclusions, deductions and exemptions.
Trump also has promised to boost infrastructure spending, which could signal higher inflation. But with nothing in place at least until the inauguration Jan. 20, Erman isn’t putting too fine a point on his advice: don’t overreact.
“You’ve got to get (legislation) through Congress and there’s plenty of time to react and to respond to changes in the (tax) law,” said Erman, who is also a tax expert. “There’s nothing to do right now.”
Erman has lived long enough to know that some election promises will become law but others will not, at least not without convoluted modifications.
“If you try to react to everything out there, you’re doomed,” he said.
Leon C. LaBrecque said he has seen more emphasis on the use of life insurance for buy-sell agreements than for estate tax strategies. LaBreque is managing partner and CEO of LJPR Financial Advisors with offices in Troy and Flint, Mich.
“If the estate tax is repealed, we’ll be grappling with the issues of what to do, if anything, with irrevocable life insurance trusts (ILITs),” he told InsuranceNewsNet.
Legally binding buy-sell agreements map out financial succession and buyout strategies if co-owners die or leave the business.
Changes to estate taxes usually occupy high or ultra-high net worth investors — such as elected officials in Washington and state capitols — but other proposed tax changes hit closer to home for middle-income taxpayers.
A tip sheet provided by LJPR Financial Advisors highlights line items on the Form 1040 individual income tax return that could see changes under a Trump administration.
Adjusted gross income, credits and itemized deductions, and the Schedule A form are likely to see the biggest changes on the 1040.
“Taxes will change on individuals, businesses, and likely estate tax levels,” LaBrecque said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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